September 2017 IssueLong scroll reading

Centerstone Investors (CETAX/CENTX)

By David Snowball

Objective and strategy

Investors Fund seeks long-term growth by investing, primarily, in an all-cap global equity value portfolio though there’s no formal limit on its ability to hold fixed-income securities, including private placements. The manager’s value discipline leads him to higher-quality firms whose stocks are selling at a discount to his assessment of their intrinsic value. As the stresses on the firm rise, so does the size of the discount he demands. The goal is to also invest with a margin of safety, which might also lead the fund to hold substantial amounts of cash when attractive and attractively-priced opportunities are not available. As of June 30, 2017, cash and cash surrogates comprise 26% of the portfolio. The manager expects to keep at least 15% of the portfolio in international stocks and typically 30% there; currently it’s 45%. Up to 20% of the portfolio may be invested in high-yield bonds and up to 10% in precious metals. Currently those comprise 1.5% and 3% of the portfolio, respectively. The manager can hedge his currency exposure but is not required to do so; currently, about 20% of currency exposure is hedged.

Adviser

Centerstone Investors Trust, which is headquartered in New York. Centerstone advises only the two Centerstone funds (Investor and International). That’s reasonably distinctive but most advisers divide their time and attention between public vehicles and private accounts. As of June 30, 2017, they had approximately $220 million assets under management.

Manager

Abhay Deshpande. Mr. Deshpande is Centerstone’s founder & CIO. He is best known for his work at First Eagle Investment Management, where he helped successfully manage most of $100 billion. He joined First Eagle in 2000, first as an analyst, then as a manager for private accounts and finally as manager on a number of high-profile funds. From September 2007 through October 2014, his charges included First Eagle Global, First Eagle Overseas and First Eagle US Value. Prior to First Eagle, he worked as a research analyst with Harris Associates, adviser to the Oakmark Finds, and as a Morningstar fund analyst. He is supported by a three person analyst team.

Strategy capacity and closure

Mr. Desphande estimates total firm capacity of less than $10 billion, but that’s not isolated to one particular strategy.

Management’s stake in the fund

Mr. Desphande has invested more than $1 million in each of the Centerstone funds. As of July 15, 2017, the trustees and officers, as a group, beneficially owned 8.0% of the Investors Fund’s outstanding shares and Mr. Deshpande, personally, owned 7.8%. All three of Centerstone’s independent directors have substantial investments in the fund, which is both rare and important.

Opening date

May 3, 2016.

Minimum investment

The minimum initial investment for Class A shares, Class C shares and Class I shares is $2,500, $2,500 and $100,000, respectively ($1,000, $1,000 and $100,000 for IRAs and other retirement plans, respectively).

Expense ratio

1.38% for “A” shares and 1.13% for Institutional shares.

Comments

Centerstone Investors first thirteen months of operation were perfectly respectable. Here’s the snapshot for the period from June 2016 through July 2017.

  Annual return Max drawdown Recovery, in months Standard deviation Downside deviation Ulcer Index Sharpe ratio
CENTX 11.0 -2.6 4 4.1 1.9 0.9 2.57
Flexible portfolio peers 10.6 -2.7 5 4.8 2.3 1.0 2.21

You could summarize that chart with the phrase, “modestly higher returns, modestly lower volatility, perfectly respectable profile.” Mr. Deshpande’s own summary (6/302017) was “respectable absolute returns while holding up reasonably well in those admittedly few moments of market weakness.”

“It’s our intention,” says Mr. Deshpande, “to manage Centerstone’s multi-asset strategies in such a way that they can serve as core holdings for patient investors concerned with managing risk.” The core of that risk management strategy is the pursuit of a margin of safety, which is manifested both in his demand that a stock’s discount to intrinsic value be more than proportionate to its potential challenges and in his willingness to hold a lot of cash in the absence of compelling opportunities in the market. His current 25% cash stake and substantial underweight of US equities speaks to his sense of a market that needs to be approached with special care.

You might reasonably ask yourself, “How did ‘respectable’ turn into $175 million in inflows during a time when almost every other active manager saw money flowing out?”

The short answer is that sophisticated investors have come to have faith in manager Abhay Desphande and his absolute value discipline. Mr. Deshpande worked on the singularly-splendid First Eagle Global (SGENX) fund for 14 years, the last six of them as co-manager. He spent a chunk of that time working alongside the fund’s legendary manager, Jean-Marie Eveillard and eventually oversaw “the vast majority” of First Eagle’s $100 billion. SGENX has a five star rating from Morningstar but was downgraded from Silver to Bronze as a result of Mr. Deshpande’s departure. Given that he is applying the same discipline here as he did there, the faith of investors is understandable.

The only troubling aspect of the fund is its archaic share class structure. “C” shares were a bad idea from inception, now they’re a bad idea and a fossil. Load-waived versions of the “A” shares do not seem widely available; presumably smaller advisors need to seek out waivers for the fund’s institutional minimum. There’s neither Investor nor Advisor share classes. For no clear reason, Scottrade offers CENTX, the institutional shares, for just $100 while Schwab has the same shares for $100,000. That’s potentially significant, not just for the hassle is represents, but also because it raises the possibility of a business model not as expertly crafted as the firm’s investment model.

Bottom Line

We are, Mr. Deshpande notes, “business analysts, not equity analysts” and “investors,” not speculators. That speaks to an important orientation: a focus on the real economy and the real companies that comprise it, not just on the vagaries of tradable paper. It’s reflected in Mr. Deshpande’s calm and studied demeanor and in his fund’s patient insistence on real value rather than relative value. Those elements explain both his long-term success and the hard-earned faith of his investors. If, as an investor, you prefer substance and constancy over flash and show, you would be well-advised to place Centerstone Investors on your due diligence list.

Fund website

Centerstone Investors

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About David Snowball

David Snowball, PhD (Massachusetts). Cofounder, lead writer. David is a Professor of Communication Studies at Augustana College, Rock Island, Illinois, a nationally-recognized college of the liberal arts and sciences, founded in 1860. For a quarter century, David competed in academic debate and coached college debate teams to over 1500 individual victories and 50 tournament championships. When he retired from that research-intensive endeavor, his interest turned to researching fund investing and fund communication strategies. He served as the closing moderator of Brill’s Mutual Funds Interactive (a Forbes “Best of the Web” site), was the Senior Fund Analyst at FundAlarm and author of over 120 fund profiles. David lives in Davenport, Iowa, and spends an amazing amount of time ferrying his son, Will, to baseball tryouts, baseball lessons, baseball practices, baseball games … and social gatherings with young ladies who seem unnervingly interested in him.